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The Office of Superintendent of Bankruptcy is a special operating agency associated with Industry Canada, part of the federal government. The “OSB” regulates bankruptcy trustees (the people who administer bankruptcies and proposals, and ensure they comply with all aspects of the Bankruptcy and Insolvency Act). As the regulator, the OSB will often seek the input of various stakeholders to determine if changes to their regulations of trustees are required, and they have just announced a “Trustee Licensing Consultation” to review various aspects of insolvency regulation in Canada.

One of the items being considered is whether or not to allow non-trustees to serve as administrators of consumer proposals. As our regular readers will be aware, a consumer proposal is a legally binding settlement negotiated between a debtor and their creditors, with the assistance of a consumer proposal administrator. With the exception of the province of Nova Scotia, where provincial representatives may administer consumer proposals, all consumer proposal administrators in Canada are licensed bankruptcy trustees.

The issue being considered is this: should the OSB allow non-trustees to serve as administrators of consumer proposals?

On February 7, 2008 the Standing Senate Committee on Banking, Trade and Commerce in Ottawa heard a presentation from Henrietta Ross, the Executive Director of the Ontario Association of Credit Counselling Services (OACCS).

Ms. Ross presented the argument that accredited credit counsellors (in addition to licensed trustees) should also be permitted to administer consumer proposals. She gave three main reasons:

  1. To eliminate the “monopolistic approach that limits access to the consumer proposal”, since only licensed trustees can act as administrators;
  2. To “provide Canadians with equality of access”; and
  3. To increase OACCS member agencies revenue to allow them to provide their other services.

What’s my opinion?

First, let me start by stating my bias: I am a licensed bankruptcy trustee, and my firm files many thousands of bankruptcies and consumer proposals each year, so obviously I have a vested interest in maintaining the status quo; it’s what I do for a living.

Second, let me also say that I have personally met Ms. Ross on a number of occasions, and I have a great deal of respect and admiration for her, and for her organization. On a daily basis I interact with many credit counsellors who work at OACCS member agencies. I refer debtors to credit counsellors when I believe a credit counsellor can best solve their problems, and I refer debtors to OACCS member agencies for the counselling required when they file a bankruptcy or a consumer proposal.

In my twenty plus years in the insolvency business, I can honestly state that the accredited, not for profit credit counsellors I have worked with have all worked very hard in the best interests of their clients, and I would never question their competence or integrity.

I agree that these are difficult times to be a not for profit credit counsellor. As Ms. Ross correctly points out, many years ago the government provided funding directly to not for profit credit counselling agencies. When that funding stopped, as Ms. Ross eloquently stated:

Some agencies were forced to close, others narrowed their service operation and the larger agencies continued to operate by finding alternative revenue streams. Revenue came from voluntary fair-share contributions from creditors, educational seminars for employee groups, the sale of educational material and the bankruptcy counselling that we do.

Over the years not for profit credit counsellors began to offer Debt Management Plans, or DMPs, where creditors (like the banks and credit card companies) would agree to make a “fair share” contribution to the work of the counselling agency to fund their efforts. In a DMP the creditors are paid in full, without interest, so a successful DMP is good for the banks, because they get back all of their money, and it’s good for the debtor, since they don’t have to pay interest, and they are given time to pay.

Unfortunately a DMP is generally not as good a solution for most people as is a consumer proposal. Again, to quote Ms. Ross:

The debt management plans, DMPs, available through credit counselling provide consumers with a workable option to repay debt. Most people who undertake DMPs are technically insolvent, or close to it, but are determined to honour their credit obligations and repay their debt. DMPs are negotiated with creditors to provide full debt repayment over an extended time frame. Upon acceptance by the creditors, member agencies manage and administer these DMPs and are authorized to operate trust accounts to facilitate payments to creditors.

Voluntary DMPs do not provide court protection for consumers, nor mandate creditors to stop charging interest on the debt, nor mandate a specified time frame for creditors to respond to debt repayment proposals. They do not mandate that creditors accept a pro-rated share of the debtor’s ability to repay, nor do they address complex entitlement issues that may require a more formal plan.

On the other hand, consumer proposals are a court-supervised option to repay debt. A consumer proposal is an offer made by a debtor to their creditors to modify their payments in an effort to settle the debt. Under a proposal, a debtor may offer to pay a lower amount each month over a longer period of time or to pay a percentage of what they owe. A significant benefit to consumers of a consumer proposal is protection by the courts from unsecured creditors. This is important because it prevents creditors from taking legal steps, such as seizing property or garnishing wages, to recover debts.

I agree with Ms. Ross. A DMP is not binding on the creditors. If you have five creditors, and only three of them accept the DMP, the other two can still attempt to sue you and garnishee your wages. In a consumer proposal, if the majority of the dollar value of creditors agree, all creditors must accept the proposal. It is legally binding.

It is easy to see the problem faced by not for profit credit counsellors. The government withdrew their financial support many years ago, forcing the closure of many agencies. Debtors who need the services of not for profit credit counsellors generally don’t have the money to pay for those services, so it is difficult for agencies to cover their operating costs. DMPs were a great way for not for profit credit counselling agencies to generate revenue to cover their costs (through the “fair share” contributions made by creditors), but as debtors realize that a consumer proposal is often a superior alternative, the percentage of debtors filing a DMP has fallen, resulting in reduced revenue for credit counselling agencies.

Realizing that consumer proposals are the superior alternative, many not for profit credit counselling agencies began working with trustees to offer consumer proposals to their clients. They would meet the debtor, asses their situation, gather the necessary financial information, determine their debt load, and then prepare the files for the trustee. The trustee then only had to “show up” at the credit counsellors office to witness the debtor signing the paperwork. The trustee would pay the credit counsellor for their work, and it was a “win-win” for everyone. The credit counselling agency earned some revenue, and the trustee had access to a steady stream of clients without having to do very much work.

Unfortunately, the OSB has rules against this approach. Federal law requires a licensed trustee to personally assess the debtor before they file a bankruptcy or proposal. Directive No. 6R3 Assessment of an Individual Debtor, requires the trustee to personally meet with the debtor and review their assets, liabilities and income, and to review all of the options available for dealing with their debt problems.

Directive No. 15, Trustee Consultation Fees in Bankruptcies and Proposals, specifically prohibits a trustee from charging a fee in most circumstances prior to the bankruptcy or proposal filing (unless that fee is then deposited into the estate).

Section 49 of the Bankruptcy and Insolvency Rules states that:

49. Trustees shall not, directly or indirectly, pay to a third party a commission, compensation or other benefit in order to obtain a professional engagement or accept, directly or indirectly from a third party, a commission, compensation or other benefit for referring work relating to a professional engagement.

Trustees therefore cannot pay a referral fee to a credit counsellor for assessing a debtor, or helping to prepare the file, as described in more detail in the OSB position paper on Referral Agreements between Trustees and a Third Party.

Unfortunately once the OSB realized what was happening, they had no choice but to enforce the rules and stop these practices, as noted by Ms. Ross:

For some time, the larger of the credit counselling services had prepared files for consumer proposals on behalf of certain trustees. This included statutory counselling, interviewing and assessing the debtor, and confirming the debt load. The Superintendent of Bankruptcy has recently determined that it is incompatible with the trustee’s responsibility to outsource this work. This decision has affected our agency’s revenue to the detriment of its ability to provide broader services as well as BIA proposals.

I both sympathize and empathize with the plight of accredited not for profit credit counselling agencies. They are trying to help people deal with their debts. Who else is there to fight for the little guy.

We spend each day meeting with people in financial distress. These are real people who, in many cases, have lost their jobs, gone through a marriage breakup or suffered through an illness; and after these personal tragedies, they are faced with insurmountable debt.

These are not bad people. We believe it is important that when parliamentarians draft bankruptcy legislation, they remember that real people are affected.

About 100,000 Canadians file bankruptcy or a proposal each year.

Banks want you to borrow money on their high interest rate credit cards. Finance companies want you to get a high interest rate loan. Payday loan companies want you to get a very high interest payday loan. They all spend millions of dollars in advertising each year to encourage you to borrow and consume.

Not for profit credit counsellors fight against this onslaught of debt. They spend many hours each day helping people work out a budget. They provide education programs to help the average Canadian understand the world of debt, and how to avoid it. They are the only voice in the wilderness telling you to spend less, not more.

But they can’t pay the rent in their offices, and pay their staff salaries, and pay for the supplies to help you make a budget if they have no revenue.

And that’s one of the reasons why, as Ms. Ross freely admitted, that not for profit credit counsellors want to be given permission to administer consumer proposals. It would give them a source of revenue so that they can continue their good work. Who could argue with that?

I certainly don’t argue with doing good work. I agree that someone has to tell Canadians to spend within their means, and to stop borrowing to consume.

Unfortunately I can’t agree with the notion that credit counsellors should be permitted to act as consumer proposal administrators as a way to increase their revenue.

My main objection to allowing non-licensed trustees to administer consumer proposals is that it is a government requirement that the trustee, as stated in Directive No. 6R3 Assessment of an Individual Debtor, must advise the debtor of all of their options, and the implications of all of their options. That means that as a trustee I must explain to all debtors the ramifications of doing nothing, do a debt settlement, getting a debt consolidation loan, doing a debt management plan through a not for profit or for profit credit counsellor, and doing a consumer proposal or personal bankruptcy. I can explain the implications of a bankruptcy, because I am a licensed bankruptcy trustee. I fully understand the process, so I can explain it. How can a non-trustee have the same level of knowledge as a trustee?

The Directive requires me to explain: “transfers, preferences and settlements of real or personal property of the debtor.” Is that something all credit counsellors understand? Do all credit counsellors understand the new surplus income rules, and how they are calculated in practice? Do credit counsellors understand the discharge process, and the court process, in a consumer proposal or a bankruptcy?

Credit counsellors would argue that they can learn all of those things, and I agree. The best way to become knowledgeable about the entire process is to become a trustee. Currently the average trustee has a university degree, many years of practical experience, and they have passed a series of very complicated courses that take on average five or more years to complete. It takes a long time to become a trustee. But, if a credit counsellor wants to become a trustee, they can find a sponsor, enroll in the program, and become a trustee, and then they can administer consumer proposals.

I believe this discussion is missing the real issue. As Ms. Ross correctly stated, not for profit credit counselling agencies are suffering from declining revenue, which is why they want to administer consumer proposals. The solution is not to make credit counsellors into consumer proposal administrators; the solution is to find a way to increase their revenue, doing what they do best.

What credit counsellors do best is credit counselling. They are highly skilled in providing advice on budgeting and money management. They are excellent educators. They should concentrate on what they do best. But how do they generate the revenue to cover their costs to provide this un-biased money management education?

The most obvious answer is through the revenue they receive from the credit counselling that they provide to individuals that have filed a bankruptcy or consumer proposal in Canada. Every individual that files bankruptcy or a consumer proposal is required to attend two credit counselling sessions, as described in Directive No. 1R2, Counselling in Insolvency Matters. Many trustees in Canada, outsource the majority of our credit counselling sessions to external counsellors. We do this because we want our debtors to get the best possible counselling so that they learn proper money management skills, so that they don’t have any future money problems.

Rule 131 of the Bankruptcy & Insolvency Act Rules prescribes the rate that is to be paid for the two required counselling sessions: $85 for each individual session, or $25 per person if the counselling is provided in a group session. In other words, a trustee may “outsource” the counselling requirement to a licensed credit counsellor, and the trustee may pay the credit counsellor, from the funds in the estate, $85 for each individual credit counselling session.

While $85 may sound like a lot of money, it isn’t. Many counselling sessions can take an hour or more, and that $85 must cover the counsellor’s wages, and all other overheads (like rent, administrative costs to book the appointment, training costs, etc.). Even worse, that $85 amount has remained unchanged for many years. $85 in 1994 is the equivalent of more than $115 in equivalent dollars today.

So the first, and most obvious solution, is to increase the amount that is paid for credit counselling sessions. Increasing the rate to $115 per session would bring the tariff back to where it was in 1994. I would go one step further: I would increase the rate to $125, or even $150 per session. Those increased resources would provide greater revenue to not for profit credit counselling agencies, since trustees would have more resources to pay them.

In addition to increasing the rate, I would increase the number of credit counselling sessions required.

Currently the first session must be done in the first 60 days of the bankruptcy or proposal, with the second session completed before the 210th day. That timing makes sense for a bankruptcy that lasts for nine months, but it may not be sufficient for a bankruptcy that lasts for 21, 24, or 36 months, as they often now do under the new bankruptcy rules. It’s also not sufficient for a consumer proposal that can last for up to five years.

So, my second suggestion is that for all bankruptcies that are automatically extended past nine months, a third counselling session should be added, to occur at some point in the second year. In addition, for all consumer proposals that last for greater than twelve months, a third counselling session should be added.

This new third session could focus on a review of the techniques learned in the first two sessions, and could include a review of the budget the debtor should be keeping during their insolvency process. This extra counselling session could be used to review different methods of saving (like the new Tax Free Savings Account), and could cover more advanced budgeting techniques. Perhaps this new counselling session could include an interactive web based component, allowing debtors to track their budget information on line. There are many tools that already do this, so it would not be that difficult to develop the content for the new third credit counselling session. Credit Canada, a not for profit credit counselling agency, has created a Financial Coaching Seriesa that costs $120 per session for six sessions, so the expertise and content already exists for this extra counselling session. In fact, I would seek the input of the not for profit credit counsellors, including the OACCS, to help design this third session.

By raising the counselling rate from $85 to $125, and by adding a third session, the revenue generated by each personal bankruptcy or consumer proposal would increase from $170 to up to $375. That increase in revenue would go a long way towards helping not for profit credit counsellors help the people they want to help.

Is this the perfect solution? Probably not. I’m sure with further consultation even better strategies can be developed. But with this approach the real problem of reduced revenue for not for profit credit counsellors can be solved, without creating a new problem of having non trustees administering consumer proposals.